DACT Treasury Beurs 2010 Optimal financing strategy anno 2010 Cefas van den Tol and Rob Frijlink 12 November 2010
Presenting today Cefas van den Tol Managing Director DCM Cefas joined the Debt Capital Markets team in 2007 and is heading the investment grade corporate bond origination for ING in Western Europe. The role includes related interest and currency hedging advisory Previously Cefas worked at ING Financial Institutions from 2001 after being at ING Lease since 1997 Cefas holds a masters degree in Business Administration from the Erasmus University in Rotterdam and a post graduate from the Inter- Alpha Executive Banking Programme at Insead Fontainebleau Rob Frijlink Managing Director Event Finance Rob joined ING Event Finance in Feb 2008 and is responsible for structuring, coordination and execution of transformational deals for European Corporates, such as major acquisitions, refinancings and restructurings Previously Rob worked for 13 years at ABN AMRO in Corporate Advisory, Capital Structuring, Structured Finance and Corporate Centre/Consultancy. Before joining ABN AMRO he worked for 4 years at Fokker Aircraft Rob holds a masters degree in Industrial Engineering & Management Science from the Technical University of Eindhoven T: +31 (0)20 562 8977 M: +31 (0)6 2185 0858 E: Cefas.van.den.Tol@ingbank.com T: +31 (0)20 564 7784 M: +31 (0)6 3048 4843 E: Rob.Frijlink@ingbank.com November 2010 1
Contents 1. Credit market update 2. Financing strategy & case study 3. Debt issuance considerations November 2010 2
1. Credit market update
Syndicated loan market outlook Benelux Syndicated Loans Redemption profile Funding perspectives 90 80 70 60 50 40 30 20 10 0 200 180 160 140 120 100 80 60 40 20 0 2010 2012 2014 2016 2018 2020 Volume in bn (LHS) Number of deals (RHS) Spread in bp 350 300 250 200 150 100 50 0 1Q'00 3Q'01 1Q'03 3Q'04 1Q'06 3Q'07 1Q'09 3Q'10 EMEA region only investment grade loans All Western European Loans with 3-5 year tenure Most bank debt matures within 3 to 5 years and spreads are still elevated Although spreads are reducing, corporates are looking for alternative funding sources Source: Dealogic, Bloomberg November 2010 4
Funding levels and spreads into 2012 Interest rate forecasts 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00% Oct-10 Jan-11 Apr-11 Jul-11 Nov-11 Feb-12 May-12 Aug-12 Dec-12 Credit spread forecasts 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 US$ Official rate US$ 3mLibor US$ 5yr swap rate Official rate 3m Euribor 5yr swap rate 5yr swap rate 5yr BBB corp yield 5yr A corp yield ING expects the first interest increase in Eurozone in 4Q 11 and in USA 2Q 12 Corporate bond markets remain in good shape and spreads are expected to further decrease November 2010 5
The demand angle for credit Redemptions and coupon payments leave credit markets looking for exposure 1,400 250 80 bn 1,200 1,000 800 600 400 200 0 230 220 210 273 214 224 208 210 125 144 129 250 310 160 240 500 570 575 320 315 415 2009R 2010F 2011F Spread 70 200 60 150 Average 2008 50 40 100 Average 2009 Average 2010 30 50 20 10 0 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Volume Coupon payments Covered Fin redemptions Senior Corp redemptions Senior Fin redemptions Covered Fin supply Senior Corp supply Senior Fin supply Fin Senior ASW spread (bp, LHS) Senior unsecured supply ( bn, RHS) Ample liquidity causes investors to look for investment opportunities But senior unsecured bond bank issuance spread levels are lagging historic averages November 2010 6
2. Financing strategy & case study
Various drivers influence the optimal financing strategy 2 Business profile 1 3 Optimal Sector Financing strategy Financial profile 4 Access to funding November 2010 8
Case study example: Company X How to optimize the financing strategy? m Key financials (in m) 2008 2009 2010F 2011F 2012F Sales 6,450 6,000 6,300 6,615 6,946 Y-o-Y Growth (7.0%) 5.0% 5.0% 5.0% EBITDA 839 600 693 794 868 Margin (%) 13.0% 10.5% 11.0% 12.0% 12.5% Capex 452 390 450 500 550 Dividend 200 200 200 200 200 Net debt 1,700 1,350 1,400 1,150 1,025 Net debt / EBITDA 2.0x 2.3x 2.0x 1.4x 1.2x Total assets 7,050 7,000 7,050 7,125 7,225 Shareholders 3,400 3,600 3,525 3,563 3,613 Equity Debt maturity profile 800 600 400 200 0 750 300 2011 Syndicated facility 1 2012 Syndicated facility 2 2010 2011 2012 2013 2014 Company information Top 10 player in the consumer sector Mostly active in the nutrition business, with main products being food supplements Enterprise value of 5.5bn No external rating in place; implied credit profile is estimated at investment grade (A-) Reporting under local GAAP Employees: 17,000 FTE Current financing situation Leverage at year-end 2010 expected of 2.0x with 1.4bn of drawn net debt Limited funding diversification; >90% attracted in bank market Large upcoming refinancings in 2011 & 2012 November 2010 9
Driver 1: Sector 2 1 3 4 Trends Competitive environment Cyclicality and seasonality Capital intensity Legislation and regulation Growth, consolidation, dependence on R&D, etc impacting funding need evolution Highly competitive markets generally lead to more costsconscious financing and pressure on operating margins Influences funding and working capital needs and; Target leverage and need for funding flexibility Large investments and R&D expense could lead to higher funding needs and higher leverage, due to deferred EBITDA Influences operating margins, yield potential, cash flow generation/visibility and investment needs The sector determines to a large extend the optimal capital structure and target leverage November 2010 10
Company X: top 10 player in European nutrition sector General trends in consumer sector Rising commodity prices put pressure on input prices and margins Active investment trend in emerging countries, whilst securing mature home markets A shift in preferences from main stream products to private labels is still going on Health, comfort and pleasure are trends in the nutrition subsector within consumer sector Corporate responsibility trend has not been affected by the crisis and is still increasing Financing implications Key focus is on product innovation, requiring significant investments in product development and marketing Additionally, company X aims to internationally expand and invest in emerging countries Total investments to keep up with the trends in the sector, will total 1.5bn in the coming 3 years November 2010 11
Driver 2: Business profile 2 1 3 4 Strategy Direction and scope of an organisation over the long-term Cash flow generation Cash flow visibility and stability EBIT(DA) margin Comparable to peers? Stable or improving margin? Diversification Investment needs Corporate governance Geographical and/or product diversification Maintenance and growth capex Acquisitions, disposals and investment plans Solid corporate governance supports a larger investor base Maintaining adequate financial flexibility to accommodate growth opportunities and uncertainties November 2010 12
Company X: product innovation and growth in emerging markets are key priorities Business profile Strategic focus is on product innovation, aiming to generate 200m of innovation related sales in 2011 and building up onwards In addition, company X targets to invest significantly in emerging markets, to boast sales by another 300m as of 2011 and onwards Cost containment program started and continuing to select disposals of noncore assets in the next years to restore profitability to pre-crisis levels Emer- Emerging 5% US 15% EBITDA by geography Other 5% Europe 75% Financing implications New financing of 250m required in 2011 to achieve this growth Securing adequate financing flexibility for M&A opportunities is key Company X s debt capacity as per 2011 is at target leverage of 2.0x estimated at 440m Acquisition capacity is estimated at 600m with assumed EV/EBITDA acquisition multiple of 7.0x Other 20% Health 30% EBITDA by business Nutrition 50% November 2010 13
Driver 3: Financial profile 2 1 3 4 Target credit profile Desired financial flexibility Financial objectives Off B/S obligations Maturity profile Hedging policies Investment grade or sub-investment grade Implied credit rating (i.e. leverage trade-off) Growth aspirations, working capital swings Preferred liquidity position to absorb negative cash flows What type of financial performance is aspired, e.g. RoE, RoCE, Costs of funding, EPS, DPS etc Off B/S liabilities (e.g. pensions, leases) could create future funding needs and impact investor appetite Maturities will need to be spread and match expected cash flows Minimum required liquidity What is risk appetite as embedded in hedging policy regarding interest, FX, commodity and inflation risks Financial profile should be directed towards flexibility and liability diversification to retain adequate access to funding November 2010 14
Company X: target leverage of 2.0x and aims for funding diversification Financial profile Strong revenue stream, relatively stable cash flow generation the weakened leverage in 2009 of 2.3x is expected to recover to 2.0x in 2010, in line with target leverage At present a refinancing risk and concentrated debt maturity profile No extern rating, but an implied A- credit profile; wiling to apply for a rating if beneficial Overall targeting to diversify funding base, spread maturities and secure flexibility for M&A agenda Impact of lengthened maturity profile and funding diversification on credit profile m 800 600 400 200 0 750 300 2010 2012 2014 2016 2018 2020 2022 2024 2011 Syndicated facility 2012 Syndicated facility New 5 year credit facility 250 250 New LT DCM products 500 Business risk profile Excellent Strong Satis- Factory Financial risk profile Modest Intermediate A+ A A A- BBB+ X BBB X November 2010 15
Driver 4: Access to funding 2 1 3 4 Company size Investment case Funding need over time Shareholder structure (Implied) rating profile Larger companies have easier access to funding outside the banking market and (statistically) lower risk of defaulting Historical track-record and return, as well as forward looking outlook and investment plans / market forecasts Amount, visibility and flexibility requirement Growth aspirations with (large) investments in the next years Type and concentration of shareholders yield or growth oriented. Management influence, governance and disclosure An external credit rating gives access to a larger investor base Investment grade companies will have easier access Access to bank and public markets is highly dependent on the (implied) credit profile, investor appetite, timing and costs the company is willing to accept November 2010 16
Company X is aiming to access debt capital markets to diversify its funding mix Considerations To diversify its funding base, spread maturities and secure flexibility Company X plans to refinance 750m of its existing debt and attract 250m of new debt, for working capital swings Company X aims to diversify away from the bank market and is willing to consider an external credit rating Instrument Pros Cons Bank Market Syndicated Loan Flexible, simple and efficient instrument No rating or public disclosure required Typically corporate tenors up to 5yr Financial covenants US PP No public documentation Typically $50m to $500m Maintenance covenants Prepayment penalty (make-whole) Debt Capital Market EUR PP Non Rated EUR Bond Rated EUR Bond Both loan (customized) and note (standardized) format No public rating required No financial maintenance covenants Deep market depth Longer tenor possible No financial maintenance covenants Limited market depth Not a liquid instrument for investors More execution risk Premium paid for absence of rating Minimum issuance size 300m Requires efforts to obtain and maintain public rating November 2010 17
Financing strategy drivers 2 Business profile 1 Sector Optimal financing strategy & structure Target leverage Funding mix 3 Financial profile Maturity profile Working capital financing Dividend policy 4 Access to funding November 2010 18
Optimal financing strategy for Company X Factors 1 2 3 4 Sector Business profile Financial profile Access to funding Company X Rising input prices Investment trend in emerging markets Shift in product preferences Significant investments in innovation and emerging markets Cost containment Target leverage 2.0x Implied rating A- Concentrated maturity profile Bank dependency Solid track-record and positive outlook Refinancing and new funding need in 2011 No external rating Total financing need of 1bn: 750m refinancing and 250m growth funding Option 1: No rating obtained 5yr 250m Revolving Credit Facility 5yr 500m Unrated Bond 10yr $ 300m ( 250m equivalent) US Private Placement (incl. cross-currency swap) Option 2: Rating obtained 5yr 250m Revolving Credit Facility for working capital swings 15yr 500m Rated Bond 10yr 250m EUR Private Placement November 2010 19
3. Debt issuance considerations
Credit rating considerations Pros An independent, credible third party assessment of credit quality, comparable on a global scale Cons Having an external credit rating brings along additional costs initially and annually Increase transparency of operations, providing comfort to existing lenders Management time is required to obtain and maintain a relationship with the rating agency Broadening of financing options and potential investor base (incl. cost benefits) Will the agency be able to adequately assess and monitor the credit quality Overcome regulatory restrictions for potential investors Rating actions cannot be controlled or timed Increase commercial awareness and financial discipline within company As preparation for future activities (e.g. M&A), when time pressures on management might be greater November 2010 21
Credit curve of rated vs unrated issuers 320 280 240 200 160 120 80 40 0 1 2 3 4 5 6 7 8 9 Log. (Unrated triple-b credit curve) Log. (Consumer BBB/BBB- credit curve - Ahold / Bacardi / Carlsberg / Casino / Edenred / Imperial Tobacco / Metro / Michelin / Sara Lee / Swedish Match / Delhaize / Kraft Foods / PPR) Investors typically require a premium over rated sector peers credit curves for unrated issuers which for a triple B company could be between 50-100bp and for a low A rated between 10-50bp November 2010 22
Bond characteristics for Company X EUR Public Bond EUR Private Placement USD Private Placement Tenor & Amount Tenor: 5 & 15yr Amount: 500m - 1bn Tenor: 10yr Amount: 250m Tenor: 10yr Amount: $ 300m Cost Premium for inaugural issue Premium for illiquidity & unfamiliarity Illiquidity premium over public bonds Availability Disclosure Simplicity Current market dynamics are supportive Current market dynamics are supportive Base Prospectus Bilaterally agreed Documentation process is straightforward Bilateral dialogue with investor Stable market Offering memorandum only provided to prospective investors Documentation process is straightforward Flexibility Prepayment could trigger break-funding costs Direct dialogue possible with investor Bullet & amortizing structures available Time to market / execution 4 to 6 weeks 4 to 6 weeks 6 to 8 weeks Documentation considerations Typically covenant light Typically covenant light 1 to 3 financial covenants typical November 2010 23
Documentation requirements Offering Document EUR Public Bond EUR Private Placement USD Private Placement Risk Factors Required Preferred Not required Terms &Conditions Required Preferred Preferred Business Description issuer Required Preferred Required Financial Information Required Preferred Required Placement Agreement Marketing document Representations, warranties and undertakings given by issuer Conditions precedent to the issuance of notes ICMA Standard ICMA Standard Details to be negotiated / ICMA preferred Details to be negotiated / ICMA preferred NAIC Model Note Agreement serves as base to negotiations NAIC Model Note Agreement serves as base to negotiations Agency Agreement Required Required N.A. Legal document Legal document November 2010 24
Pricing considerations Pricing reference graph 300 275 250 225 200 175 150 125 100 75 50 25 0 Indicative pricings SKSLN AFFP EGGER NYRB OTTOGR PRYSMI CLSGR OUTOK UCBBB EVONIK HAVAS NESTEO SIXT VOEST CASINOKTCGAV UCBBB NESTEO SYMRIS CDIFP LUXIM DCPRIM ASKLEP BEKBBB BEKBBB LENV ANDRTZ MAERSK ITELOY ADSGR FLUXBB BEKBBB GEDISC GBLBBB HEIANA DIETE HEIANA HEIANA DIETE SAPGR SAPGR Tenors Unrated bond Rated bond Rated private placement Unrated $ private placement Unrated $ PP over (Euro) MS SAPGR 5 year MS +120bp area MS +75bp area MS +85bp area UST + 130bp area MS + 84bp area FRAGR 10 year MS +140bp area MS +90bp area MS +105bp area UST + 130bp area MS + 104bp area Option 1: Indicative unrated $ PP pricing Log. (A/A- rated Consumer credit curve) Log. (Option 1: Indicative unrated public pricing) Log. (Unrated credit curve) Log. (Option 2: Indicative rated public pricing) Log. (Option 2: Indicative rated PP pricing) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 15 year MS +170bp area MS +125bp area MS +145bp area UST + 140bp area MS + 90bp area November 2010 25
Appendix
Inaugural issuers lead by ING Sector Rating Tenor Size Issuance Spread Coupon Logo Utility Baa1 10yr 500m 15-Oct-10 127bp 3.875% Logo Real Estate Baa1/BBB+ Long 7yr 500m 13-Oct-10 240bp 4.625% Pharma NR 7yr 500m 16-Apr-10 180bp 4.500% SAP IT NR 4yr 7yr 500m 500m 31-Mar-10 31-Mar-10 45bp 70bp 2.500% 3.500% Logo Commodities NR 5yr 400m 30-Mar-10 410bp 6.375% Logo Natural Resources NR 5yr 225m 26-Mar-10 285bp 5.500% November 2010 27
Inaugural issuers lead by ING (Cont d) Sector Rating Tenor Size Issuance Spread Coupon Utility A3/A- 5yr 12yr 500m 500m 2-Feb-10 2-Feb-10 70bp 100bp 3.250% 4.500% Utility Baa3/BBB Perp NC7-NC12 500m 2-Feb-10 360bp 6.655% UCB Pharma NR 5yr 750m 26-Oct-09 285bp 5.750% Maritime NR 5yr 750m 23-Oct-09 205bp 4.875% Alliander Utility A2/A 3yr 7yr 500m 750m 6-Apr-09 6-Apr-09 175bp 230bp 4.000% 5.500% Gasunie Utility Aa2/AA- 5yr 1bn 23-Jul-08 195bp 6.000% November 2010 28
Disclaimer This presentation of ING Bank N.V. ( ING ) shall serve solely for the information of the participants of the DACT Treasury Beurs 2010 (the Client ) as a platform for discussion. Copyright and intellectual property right protection of this presentation is reserved to ING. It may therefore not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved. While ING has taken reasonable care to ensure that the information contained herein is not untrue or misleading at the time of presentation to the client, ING makes no representation with regard to the accuracy or completeness of the information, part of which was obtained from the client and public sources and relied upon as such. The information contained in this presentation is subject to change without notice. Neither ING nor any of its officers or employees accepts any liability for any loss arising from any use of this presentation or its contents. The information is further subject to there having been, in the sole opinion of ING, no material adverse change in the international capital or loan markets prior to the implementation of this proposal. This presentation does not constitute an agreement or a commitment or an offer to commit to any transaction or any financing by ING. Any such commitment or agreement shall be subject to further negotiation, satisfactory completion of due diligence, ING credit and other approvals, execution of legal documentation acceptable to ING and receipt by ING of positive opinions from legal counsel. ING calls for attention to the fact that it is part of ING Groep N.V. ( ING Group ). Members of ING Group may advise or provide services (including investment advice) and act as an active investor in equity shares and other securities. Please be informed that in order to avoid any possible conflicts of interest, investment decisions in securities are taken fully independently by the investment portfolio professionals. November 2010 29